No correction until the shorts make their move

Avi Gilburt is author of
ElliottWaveTrader.net, a live trading room and member forum focusing on
Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts
and wave counts that is free of personal bias or predisposition. A lawyer and
accountant by training, he is also managing member of Gilburt Financial
Services, LLC, which provides financial markets analysis and consulting. His
Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he
is a certified contributor, and
TheTechTrader.com with Harry Boxer.

Last weekend I said "it would seem that 1515 on the eMini S&P 500 futures will likely be seen, if not higher, up to the 1520ES region," and, Friday, we topped right at 1515ES. So, is this finally the top everyone and their grandmother has been expecting?

Well, by the fact that almost every other article that comes out on Marketwatch for the last two weeks warns of a correction, you would think we should be trading around 1450
US:ESH3
by now, if not lower. By the fact that every other person that comes onto CNBC is either expecting a correction or market crash, you would also think we would have been much lower this week and not higher. Well, we know how often the pundits are correct about market direction, which is why most analysts are not trusted by the public.

One thing is for certain in an uncertain market; as I have warned for the last two weeks, those who have been advising that a major correction is imminent or those attempting to short this market have likely been shaken, if not stirred. Even though so many are calling for a correction, the market has gone up as I warned it could last week. The market will not make it so easy for people to short, and those who have been attempting to short this market have been left scratching their heads.

I have been quite resolute in the fact that no deep correction will begin until the market is able to breach the 1490/94ES support region. But it has tested this region numerous times, giving us very good exit levels for short-term short trades, as well as very good entries for short-term long trades.

In fact, Thursday’s drop to the 1494ES level again provided a very nice low-risk buying point for a long trade I entered on Thursday and exited on Friday with a 20-point gain. While these trades were truly for the most nimble and aggressive traders, more conservative traders were simply looking to take profits as we moved higher into our risk zone, or simply moving their stops up to just under the 1490ES support region.

But the patterns we have been left with on Friday have truly left me somewhat unsure as to the market's intention in the very near term. While always being open-minded as to what the market may do, it sometimes leaves me with many possibilities about what the market will do. And in some circumstances, it is nigh impossible to clearly identify which of the pattern potentials are going to immediately play out with a high level of confidence, so I wait for further market cues for confirmation. So, let me give you the possibilities I am now seeing.

As you can see from the 60-minute chart linked to at the bottom of the column, I have several potential patterns that are pointing to a near-term top. However, there is one very bullish pattern that has been left off the 60-minute chart, but is represented on the daily chart, which calls for a move directly into the next higher Fibonacci extension region between the 1536ES-1563ES region before a larger correction will be seen back down to at least the 1494ES region.

This pattern has the wave iv of wave 3 completed as a high level triangle, and we are on our way to complete wave 5. Although this is not the standard expectation for a wave iv retracement/correction, we do have to recognize the possibility of a non-standard wave iv early enough in the pattern so that we remain on the correct side of the market. But this is one of the main reasons I never suggest shorting a 3rd wave until we have confirmation of a breakdown.

To confirm that this potential move higher in wave v of 3 is a strong likelihood, I must see a very strong move early in the week which takes over 1521ES. For our larger time-frame swing traders, a confirmed move through the 1521ES region would then move our support floor up to the 1508ES level (so please move your stops up from 1490ES), and we will next move up that support region to 1515ES with a move through 1523ES.

For those who want to take a shorter time-frame swing trade, a strong move through the 1521ES level can immediately have you going long with a stop just under 1518ES. Even though I rarely advise to go long on a breakout, you are only risking 3-4 points for a potential 15-plus-point trade in this setup, so it is still a low-risk opportunity.

For those in our trading room during the day, we look for a pullback to the 1518/1520ES region after the break out over 1521ES for the long-trade setup in this pattern. So, there are several ways to play a potential breakout safely.

As for our near-term topping patterns, the count in green represents a potential ending diagonal in the making, which would have us expecting a pullback on Monday in a wave iv, which will set up a rally into the middle of the week to the 1520/21ES region for a local top. This potential pattern will draw in the shorts once more with a drop down toward the 1500ES region, only to whipsaw them, yet again, into short-covering on a move up to the 1520ES region.

This will truly strike fear in many shorts, and shake many of them out of their short positions, which is exactly what we need to see before we can truly have a deeper correction. But if we see such a pattern develop, then it is a high-probability setup for a short trade. But we will need to see a rather immediate decline to even begin to confirm this pattern.

The other possibility is that the market is topping very soon just below our 1520ES level (1517.50ES) in the blue b-wave, followed by a strong blue c-wave down, which could resemble a market crash. But for now, our support region between 1490-1494ES still remains the line in the sand between a sizable correction and higher levels.

As long as we are not able to breach that support, we need to expect higher levels and not expect a correction. There is one more item I want to point out. We have maintained an alternative count labeled in yellow over the last two months, with this being a wave 1 in a larger diagonal.

But with as high as we have come, I am modifying that alternative count to label this move as the top of a wave 3 of a much larger diagonal, with a drop into the 1400 region labeled as a wave 4, leaving us with a 5th wave up to complete a much larger ending diagonal sometime this coming summer.

Even though there is nothing certain in our non-linear markets, one thing is fairly clear. With so many analysts pounding the table for an imminent correction — although a little less loudly after this past week's market action — until more shorts are shaken out of their short positions, it is not likely that we will see the deep correction everyone is expecting, as the market does not do what everyone expects of it.

As Keynes said, "markets can remain irrational a lot longer than you and I can remain solvent." So, shorts beware and, more importantly, be careful and wait for confirmation. We are at a potentially very painful inflection point.

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